Economic Growth Theory

Powerful Essays
The theoretical foundations of the effect of infrastructure on growth and more generally on development outcomes are mostly found in Growth theory (Aghion and Howitt, 1998; Agenor, 2004; Agneor, 2010; Agenor and Moreno-Dodson, 2006; Barrow and Sala-i-Martin, 2004 and Straub, 2007). Economic growth is the increase in the amount of the goods and services produced by an economy over time (Sullivan, Arthur; Steven and Sheffrin, 2003). It is conveniently measured as the percentage rate of increase in real Gross Domestic Product (GDP). Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced.
The foundation of the discipline of modern political
…show more content…
Much of modern growth theories build on the neoclassical model of exogenous growth (Solow, 1956, 1957; Swan, 1956) which views the accumulation of physical capital, associated with technical progress, as the driver of economic growth. The basic assumptions of the model are: constant returns to scale, diminishing marginal productivity of capital, exogenously determined technical progress and substitutability between capital and labour. Technological progress, though important in the long-run, is regarded as exogenous to the economic system and therefore it is not adequately examined by this model (Petrakos, et. al., 2007). The most basic proposition of growth theory is that in order to sustain a positive growth rate of output per capita in the long run, there must be continual advances in technological knowledge in the form of new goods, new markets, or new processes, which was demonstrated by the neoclassical growth model which shows that if there were no technological progress, then the effects of diminishing returns would eventually cause economic growth to cease (Aghion and Howitt, 1998). Turning to the issue of convergence/divergence, the model predicts convergence in growth rates on the basis that poor economies will grow faster compared to rich ones. The…show more content…
In the endogenous growth model, the longrun growth rate of output per worker is determined by variables within the model (Romer, 1986). The theory holds that economic growth is primarily the result of intrinsic factors and that investment in human capital, innovation and knowledge-based economy leads to economic development. This school attaches greater significance to certain types of investment that create externalities and generate an additional productivity boost through production spill-over or the associated diffusion of technology (Stiroh,
Get Access